Posted by: SWL | July 28, 2011

Beware of Deception in Debt Ceiling Rhetoric

There are a couple of phrases being used inaccurately in the debt ceiling debate.

Default – We’ve been told the government will go into default if the debt limit is not raised by August 2. That is not accurate. We could go into default, but it is not automatic.

If you reach the limit on your credit card and the card issuer will not raise the limit, you can still make the required payments and remain in good standing (although your credit score may suffer). You default on the credit card only if you fail to make a payment. It’s the same with the government. They raise money by selling US Securities. The US is receiving revenue every day and will still be able to pay the interest on these securities. That doesn’t mean it’s a good situation, but it is not default (although our credit rating may suffer). We know such a situation is manageable for a short period of time because it has happened before.

A related, and oft-repeated idea, is that the US credit rating will be downgraded if the debt ceiling is not raised. But as the head of Standard & Poor’s told Congress yesterday, it is the size of the US deficit (debt) that determines the credit rating, not the amount that can be borrowed. The ratings agencies could downgrade our credit rating even if the debt limit is raised. In fact, small ratings agency Egan-Jones did downgrade the US rating on July 18. Also of note is that investment firm Pimco eliminated all US bonds from its investment funds in March.

Balanced approach – This is the phrase President Obama uses to call for raising tax rates or creating new taxes in addition to cutting spending. This is deceptive because the administration has already created a number of new taxes that are now enshrined in law but are not yet active. The health care reform legislation contained a number of new taxes, including a 40% excise tax on “deluxe” insurance plans (effective 2018) and a tax on medical devices (prostheses, walkers, etc.) that are currently exempt from tax. And we will all be taxed on the share of our health insurance paid for by our employers.

During the first 2 years of this administration, the salaries of 107,000 new federal workers were added to the federal budget. A total of $1 billion has been spent intervening in the civil war in Libya. And we cannot forget almost $800 billion spent on the 2009 Stimulus.

Given that the President has spent (and borrowed) enough to raise the deficit 14% in the past year and has increased our tax burden into the future, the “balanced approach” would be to now cut spending deeply with no new taxes of any sort.

If you hear these distorted ideas in personal conversations, politely provide the facts. When your local TV news repeats them, call the station and ask that they exercise more care in writing news copy. If your Congressperson or Senators parrot them, contact their offices and tell them to be honest with their constituents. We cannot have an open, informed debate on any issue if our legislators and president do not provide accurate, honest information.

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